Mercury Insurance 2013 Annual Report Download - page 55

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40
The following is a reconciliation of total net premiums written to net premiums earned:
2012 2011
(Amounts in thousands)
Net premiums written $ 2,651,731 $ 2,575,383
Change in net unearned premium (76,811)(9,326)
Net premiums earned $ 2,574,920 $ 2,566,057
Expenses
The following table presents the Company’s consolidated loss, expense, and combined ratios determined in accordance
with GAAP:
2012 2011
Loss ratio 76.2% 71.3%
Expense ratio 26.6% 27.2%
Combined ratio 102.8% 98.5%
The Company’s loss ratio was affected by unfavorable development of approximately $42 million and $18 million on prior
accident years’ losses and loss adjustment expense reserves for the years ended December 31, 2012 and 2011, respectively. The
unfavorable development in 2012 was largely the result of re-estimates of California BI losses which experienced both higher
average severities and more late reported claims than originally estimated at December 31, 2011. The 2012 loss ratio was also
negatively impacted by a total of $39 million of catastrophe losses mostly due to Hurricane Sandy and wind and hail storms in
the Midwest region during 2012. In addition, the 2012 loss ratio was negatively impacted by rising loss frequency and increasing
severity on the California private passenger automobile line of business. The 2011 loss ratio was negatively impacted by a total
of $18 million of catastrophe losses due to California winter storms, Hurricane Irene, and Georgia tornadoes during 2011.
The improvement in the expense ratio in 2012 was mainly due to ongoing cost reduction efforts and lower profitability
related expenses.
Income tax expenses were $18.4 million and $53.9 million for the years ended December 31, 2012 and 2011, respectively.
The decrease in income tax expense resulted from decreased taxable income in 2012.
Investments
The following table presents the investment results of the Company:
2012 2011
(Amounts in thousands)
Average invested assets at cost (1) $ 3,011,143 $ 3,004,588
Net investment income (2)
Before income taxes $ 131,896 $ 140,947
After income taxes $ 115,359 $ 124,708
Average annual yield on investments (2)
Before income taxes 4.4% 4.7%
After income taxes 3.8% 4.2%
Net realized investment gains $ 66,380 $ 58,397
__________
(1) Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average
invested assets at cost is based on the monthly amortized cost of the invested assets for each respective period.
(2) Net investment income and average annual yield decreased primarily due to the maturity and replacement of higher yielding
investments purchased when market interest rates were higher, with lower yielding investments purchased during a low
interest rate environment.
Included in net income were net realized investment gains of $66.4 million and $58.4 million in 2012 and 2011, respectively.
Net realized investment gains included gains of $45.5 million and $31.3 million in 2012 and 2011, respectively, due to changes
in the fair value of total investments pursuant to application of the fair value accounting option. The net gains during 2012 arose